Happy Monday Morning! Many of the issues we are facing today are policy decisions. They are choices made by elected officials. While I believe most policy makers are well intentioned it doesn’t mean we should not hold them accountable when mistakes are made. After all, elected officials are put in place to serve the best interests of its citizens, this is why we go to the polls every four years. And so it is worth evaluating some of the data this week to discuss where we could be going wrong. Let’s start with inflation. A global pandemic emerged and our elected officials made the decision to shut down the global economy. It turns out it’s easier to turn off the economy than it is to turn it back on. Governments panicked and the floodgates opened. Massive deficit spending. Too many dollars facing too few goods. And while spending has slowed, it’s still 11.3% higher than pre-pandemic levels on a real per capita basis. This is only making the Bank of Canada’s job even harder! Please keep this in mind when the federal government unveils their budget this week. While inflation is now slowing, it remains elevated, and largely self inflicted.

Happy Monday Morning! National housing data dropped for the month of February, and there’s a lot to unpack here. Home sales plunged 40% year-over-year in February, coming off a blistering hot market this time last year. When you zoom out further it was the weakest February since 2009. However, there’s a caveat. New listings utterly collapsed, falling to their lowest levels since February 2003. Yes, that’s a 20 year low across the country. That’s not even adjusting for the massive growth in both population and housing stock over the past two decades. Quite simply, home sellers have gone missing. As we mentioned a few weeks ago, there are a few reasons for the lack of new listings: So you’ve got a ten year low in sales and a twenty year low in listings. In other words, zero turnover. A horrible market for Realtors and mortgage brokers, although no need to feel sad for them- the previous two years were fairly generous. The illusiveness of new listings are good for prices. They’re firming up in essentially every market. For the right product, which is basically anything entry level (the only thing people can afford) is moving quickly and often in multiple

Happy Monday Morning! Central banks finally broke something. After leaving rates hovering near zero for over a decade and engaging in trillions of dollars worth of QE (Quantitative Easing) you can’t simply raise interest rates by 400bps in less than a year without something going boom in the night. It was never a matter of IF, but WHEN. There are more qualified people than me to talk about the Silicon Valley Bank debacle so i’ll keep this brief. Banks are sitting on huge unrealized losses. The bonds they bought at ultra low interest rates were destroyed in price when the Fed jacked interest rates, and bonds are the collateral supporting the entire financial system. For example, a 1% shift higher on a 9 year duration bond is a 9% hit on the bond price. So the Fed’s ability to hike rates was ALWAYs limited to the extent to which banks invested cash wisely. Silicon Valley Bank is not alone. Lots of chatter that the Fed might be done with their rate hiking crusade. Any more bank failures and we’ll be talking about deflation, not inflation. The Bank of Canada has already moved to the sidelines as confirmed last week when

Happy Monday Morning! Canadian banks reported first quarter earnings this past week. Those earnings provided an important glimpse into what’s shaping the nations housing market. Deep in the footnotes, CIBC reported that $52-billion worth of mortgages – the equivalent of 20% of the bank’s $263-billion residential loan portfolio were in a position where the borrower’s monthly payment was not high enough to cover the interest portion of the loans. The bank has allowed these borrowers to stretch out the length of time it takes to pay off the loan, which is known as the amortization period. As well, borrowers are adding unpaid interest onto their original loan or principal. CIBC isn’t alone. Both TD and BMO also allow mortgages to negatively amortize. Assuming you took out a fixed payment variable rate mortgage at TD, you can allow outstanding interest to be tacked onto the balance of the loan, so long as your loan-to-value ratio does not exceed 80%. In other words, defer any pain resulting from higher interest rates. As a result, amortizations are growing. At TD bank, 25.2% of their residential mortgages now have an amortization of 35 years or greater. A year ago, that number was essentially zero. If you’re

Happy Monday Morning! Some good news on the inflation front in Canada this past week. Headline inflation ticked in at 5.9% year-over-year, below market expectations of 6.1%. Inflation in services, which is one of the key figures policymakers are watching, eased to 5.3%, from 5.6% in December. The Bank of Canada’s preferred median and trim inflation measures continue to ease, now running at around 3.5% on a 3-month annualized basis. Progress. Meanwhile, mortgage interest costs in Canada surged 21.2% annually in January, the largest increase since the early 1990’s when the data set was first created. According to the always insightful Ben Rabidoux of North Cover Advisors, rising mortgage interest costs alone added 0.6 percentage points to the headline 5.9% print. In other words, in his pursuit of fighting inflation, Tiff Macklem is actually creating inflation too. Rather ironic, I know. Now for the bad news. While inflation is easing in Canada, it is proving to be more sticky in the US. Prices in the US, according to the Federal Reserve’s preferred metrics, rose 5.4% from a year earlier and the core gauge was up 4.7%, both hotter than forecast after slowing for several months. More importantly, Core PCE (Personal Consumption

Happy Monday Morning! National housing figures dropped this past week, and it wasn’t pretty. January home sales fell 37% year-over-year, a sharp decline from the blistering hot bull market of January 2022. When you zoom out further, this January was the slowest since 2009. However, balancing this out was a dearth of supply trickling to market. New listings for the month of January came in at their lowest levels since the year 2000. Yes, we just recorded a 23 year low of new listings coming to market. The nations housing market is currently starved of inventory, which is ultimately the largest driver behind the sudden resurgence of multiple offers popping up across the country. A housing market deprived of sales volume is ultimately a big drag on the economy. When houses don’t transact people don’t need lawyers, mortgage brokers, inspectors, contractors, and new furniture, just to name a few. It’s certainly true that the chronic shortage of new inventory coming to market is providing a floor for house prices, although plenty of damage has already been inflicted. National home prices, as measured by the Home Price Index, fell 12.6% year-over-year in January. Since peaking last year, the index is down

Happy Monday Morning! Those holding their breath for an easing in mortgage rates were delivered some tough news last week. The Canadian labour market added 150,000 jobs in January, more than TEN times economist estimates. Let’s not forget that December jobs numbers were TWENTY times estimates. Just what the hell is going on here? Either our economists are really, really bad at forecasting or the Stats Canada random number generator is in need of repairs. My good friend Ben Rabidoux at North Cove Advisors might have the answer. Immigration. Per Rabidoux and Stats Canada, “On a year-over-year basis, employment for those who were not born in Canada and have never been a landed immigrant was up 13.3% in Jan, compared with growth in total employment of 2.8%.” This makes sense. Job vacancies were sky-high in H2 2022. The Government responded by ramping non-permanent resident growth, which hit record highs over the past 2 quarters. “The increase of NPRs in the third quarter of 2022 was larger than any full-year increase since 1971 (when data on NPRs became available). This increase was driven by work permit holders…” Rabidoux concludes, that what we’re seeing now in the jobs data are work permit holders filling

Happy Monday Morning! Lots of chatter these days about increased activity in the housing market. It’s true open houses are busier, stale inventory that’s been sitting for months is suddenly under contract, and some new listings are fetching multiple offers. Quite a difference four weeks can make. Is this the end of the housing bear market? While sentiment has certainly shifted, the data suggests we’re not out of this just yet. For the month of January, Greater Vancouver home sales ticked in at their lowest levels since January 2009. Yes sales were in the dumps, but housing bulls will scream, “But there’s nothing to buy!” and this is also true. New listings trickled in at their lowest levels since 2004! Very hard to get lower prices when new listings are basically running at 20 year lows. This doesn’t account for the increase in housing stock over the past two decades either. There’s been a narrative building over the past year that a bunch of distressed sellers would flood the market as higher interest rates bite. That has not happened. So we’re stuck with very low inventory levels as we approach the busier spring selling season. Current inventory levels today would

Happy Monday Morning! As expected, one and done from the BoC this past week. Here’s Tiff Macklem, “With today’s modest increase, we expect to pause rate hikes while we assess the impacts. To be clear, this is a conditional pause. Its conditional on economic developments evolving broadly inline with our outlook.” For those playing along at home, their outlook involves a soft landing. Those hopes, of course, largely depend on the trajectory of the housing market. We’ve noticed a lot more optimism in the housing market these days. Buyers are finally coming off the sidelines after being nearly non-existent over the past six months. Stale inventory is suddenly finding a bid, sometimes going back into multiple offers. Is this the bottom? The CEO of Redfin seems to think so. At least for the US housing market. Up North i’m a bit more skeptical. While interest rates may have peaked, they remain elevated. Affordability still sucks. Variable rate mortgages are sitting at 6%, up nearly 500bps from last year. Let’s not forget about trigger rates. According to National Bank, between 73% to 80% of variable-rate fixed payment mortgages originated between 2020 and 2022 have been triggered during this tightening campaign. Variable

Happy Monday Morning! We got more encouraging news on the inflation front. Consumer prices in Canada fell on a seasonally adjusted basis, dropping -0.1% month over month, the first drop since July 2020. Yes, annual inflation still looks very high at 6.3%, but that only tells us what happened a year ago. We discussed these big fat, laggy indexes last week so no need to beat a dead horse. Let’s try to filter through the noise here. As my good friend Ben Rabidoux points out, Consumer prices have been nearly flat over the past 6 months. Remember, prices don’t have to drop, they just have to stop going up a lot. Shelter inflation remains stubbornly high, despite house prices cratering. Ironically, the largest contributor to annual inflation in Canada right now is now mortgage interest costs. A whopping 400bps of tightening on a highly levered household sector will do that. And we might not be done yet. The Bank of Canada will provide an important update this Wednesday. Markets are still expecting the BoC to squeeze in another 25bps before pausing. Twitter seems to agree. The Bank of Canada has been pretty unpredictable over the past year. My bet is on 25bps

Happy Monday Morning! Canadian inflation data drops this week on Wednesday, January 17th. This will be an important headline given that the Bank of Canada is set to meet the following week on January 25th. As of right now the market is still expecting a 25bps rate hike, but that could change if CPI comes in a lot weaker than expected. As of right now, RBC is calling for headline CPI to fall to 6.4% for December, down from 6.8% in November. That seems about right given the drop we saw last week in the US. Inflation has now fallen for six consecutive months in the US. In fact, if you remove shelter costs (huge lag), you have deflation on a monthly basis. Of course people will say you can’t remove shelter, it makes up nearly 30% of the CPI basket and people need a place to live! Of course this is true, but we all know the housing market is in the dumps, prices are falling and rents have peaked. Here’s the Zillow rent index against the shelter component of the CPI index. Shelter inflation is going to drop like a stone, give it time. The Fed knows this

Happy Monday Morning! Back to our regularly scheduled programming after a few weeks off during the holidays. Last year was an eventful year across the Canadian Real Estate spectrum to say the least. I figured i’d start off the New Year with a quick sentiment check. And the survey says… things are going to get worse. My poll on Twitter garnered nearly 5000 votes, with almost 80% of respondents calling for a further correction in prices by the end of 2023. Yes, it’s true Twitter tends to skew bearish, however it’s hard to deny that further downside is likely given the rapid surge in home prices suddenly colliding with the fastest rate hiking cycle most people have ever seen. In fact, on a debt adjusted basis, this rate cycle is more than twice as severe as the 1980’s. Prices have already dropped quite a bit. The national home price index is down 16% since it peaked in March 2022, that’s the steepest decline on record, dating back to 2005. While we are nearing the end of this rate hiking cycle, markets are still expecting more pain ahead from Tiff Macklem thanks to another strong labour report. The Canadian economy added